Energy Bounce Extends to Other Cyclical Stocks

All kinds of cyclical stocks are outperforming stocks in safe sectors today, but MoneyShow's Jim Jubak points out that two days hardly constitutes a strong trend, though it is suggestive...but suggestive of what?

Today it's not just energy stocks.

Cyclical stocks of all kinds are outperforming stocks in such safe sectors such as consumer staples and utilities.

Just like yesterday, the energy sector, beaten up soundly in past weeks, is up with the Energy Select Sector SPDR ETF (XLE) up 1.22%.

But such cyclical sectors as materials and industrials were up too with the Materials Select Sector SPDR ETF (XLB) ahead 1.47% at the close and the Industrials Select Sector SPDR ETF (XLI) up 1.33%.

In contrast, safe sectors such as Consumer Staples (XLP) and Utilities (XLU) were down 0.71% and 0.28%, respectively.

Two days hardly constitutes a strong trend.

But it is suggestive.

The question, of course, is, “Suggestive of what?”

We could be seeing nothing more than profit taking in the safe sectors that have led the market recently and money moving into bargain hunting in the most beaten up sectors. There's certainly an element of that. Stocks such as Vale (VALE) and Potash of Saskatchewan (POT) are up 2.4% and 2.51% respectively today, because, mostly, they've become enticingly cheap. (Both companies have also announced plans to spinoff assets in the last day or so.)

But I think we're also seeing a swing toward greater optimism on US growth, which is part of what makes cyclicals more attractive today. (If the US economy is going to chug ahead, then it makes sense to put some more money into stocks that will do better if the economy is stronger.)

Friday brings the monthly jobs report for November and after a 200,000-plus reading from ADP's job survey today, Wall Street is looking for another 200,000-plus net new jobs in the month in Friday's government data. (According to the ADP data, the economy added 208,000 jobs in November.) Economists surveyed by Briefing.com are forecasting a gain of 230,000 jobs for the month in Friday's numbers. That would be significantly ahead of the 214,000 net jobs created in October.

More new jobs would mean more consumer buying, Wall Street projects (on top of a boost to consumers from lower oil prices). And that optimism has done a lot to reverse the drop in retail and other cyclical stocks that followed the weaker than expected sales on Black Friday and the entire post-Thanksgiving weekend.

The problem with two-day trends is that it can be tough to predict how long they might run. A typical pattern to look out for here is “Buy on the rumor/sell on the fact.” That would suggest watching to see if Friday's good news on jobs might put an end to this shift toward cyclical stocks. (And if you think that's likely, this cyclical rally might be a good time to sell any cyclical stocks that you were looking to sell just a few days ago.)